1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

Volatility Exploitation Strategy

Discussion in 'Forex Trading Systems and Strategies' started by MattyUSA, Oct 13, 2007.

  1. MattyUSA

    MattyUSA Private

    Joined:
    Oct 3, 2007
    Messages:
    21
    Likes Received:
    0
    Hi

    Ok I have another strategy for those that don't mind high risk.

    This one relies on volatility so I guess the currencies that are the most volatile are the best. Perhaps GBP/USD and EUR/USD.

    Preamble:
    It would seem sensible to have stop loss limits closer/smaller than your profit lock limits. This way you only need to win less than half the time.

    For example:
    * If you stop loss was 3 and your profit lock was 9. One 'win' can fund up to 3 losses. To to break even you only need to be right one third of the time.
    * If your stop loss was 2 and your profit lock was 4 then you only need to be right half the time to break even.
    * If your stop loss was 40 and your profit lock was 120 then you only need to be right one third of the time to break even.

    Ok that makes sense. So I traded like that and got hit every time. The reason I wasn't trading with large enough stop loss limits. I found that with anything less than 30 pips stop loss the market volatility ensured that the closest limit (stop OR profit lock) to my opening position, got hit first.

    So I figured why not make that work for me.

    Volatility Exploitation Strategy
    1: Look at your graphs on 1 minute or 5 minute (these show the most volatility, longer charts cover that up). Decide on the latest trend, switch to a longer timeframe and use RSI(14) (if it is above 50 it may rise and below 50 it may fall) to help decide if it will continue, if you like.
    2: Place trade in direction of trend with a low profit lock limit of around 5 to 10 pips (or more if you like, but the higher this limit the greater the risk it won't trigger).
    3: Place a stop loss limit of between 50 and 100 pips. The lower the limit the higher the risk it'll trigger. If it is over the days high/low then even better.

    The theory is that since volatility causes small swings 'all over the place' even with larger trends being evident, it will be volatility causing the closest limits to be hit first. If the closest limit is the profit lock then volatility should cause it 'on average' to be hit more times than the larger stop loss.

    If you think the trend is going to reverse and is at a pivot point, then trade in the opposite direct. It shouldn't matter which direction you place the trade so long as you are not at the days high/low or in the middle of a much larger trend (i.e. a freefall or rocket rise) then you stand a good chance of being right.

    Of course you can enhance this strategy with resistance levels, fib limits and everything else as you learn more. But for newbies with reasonable capital invested and no aversion to high risk, this can be a good starting strategy allowing you to learn as you go.

    WARNING: This is risky. We are only using risk captial in Forex trading right? Only using money we can afford to lose. Of course we don't want to lose but we can take risk...? This approach is high to medium risk. ONE loss can wipe out many wins. Perhaps a trailing stop is a good idea. I haven't tried it I fear them triggering too soon.

    So far this trade strategy has worked out 'overall' for me.

    Best Wishes,
    Matt

    PS: I have used this system for 3 and 1/2 weeks. I place a single trade every morning around 7.30 and check again at 5pm. I always let the limits close the trade. I risked $50 of the initial investment with each trade then increased the risk to $100 as soon as I had that amount in profit.

    So far it has taken a mini account at from $312 to $897. Of course as noted above I only need to be unlucky/wrong once for a weeks worth of success to be wiped out.
     
    #1 MattyUSA, Oct 13, 2007
    Last edited: Oct 23, 2007
  2. egg

    egg Recruit

    Joined:
    Oct 21, 2007
    Messages:
    8
    Likes Received:
    0
    Hi Matty,
    thank you for sharing.
    How many transactions do you execute in a day with this strategy?
     
  3. MattyUSA

    MattyUSA Private

    Joined:
    Oct 3, 2007
    Messages:
    21
    Likes Received:
    0
    Hi egg

    One, usually around 7.30am. Sometimes another around 6pm but usually one. I usually risk 100pips a trade and target around 10-20pips profit a trade (sometimes a tad more) in whatever direction seems sensible.

    Best wishes,
    Matt
     
  4. timinaz

    timinaz Recruit

    Joined:
    Oct 3, 2007
    Messages:
    7
    Likes Received:
    0
    maybe I'm not getting your whole system, but with a profit of 20 and a stop loss of 100 you need to be right 5 times to cover being wrong once? I know you might use trailing stops, but the best that will do is 20/80

    but you tell that the shorter trigger ususally gets hit first and you should already be in the direction of the (micro)trend

    thanks
     
  5. Pharaoh

    Pharaoh Colonel

    Joined:
    Oct 3, 2007
    Messages:
    19,655
    Likes Received:
    2,200
    I've thought about a system like this before and would love to have an EA that could be used for backtesting it with different stoploss and take profit numbers.

    The good news is that I know roughly what would be needed for the EA.

    What would be needed would be one (or two) indicators to measure volatility, a "minimum volatility" parameter, a way to set lot size, and easily changed parameters for take profit and stop loss. It might also be good to have an indicator checking out the long term trend so that the EA would only enter trades with the current trend (perhaps a way to turn this on/off - a cautious/dangerous setting). Alternatively, a setting for what times to activate trades like this.

    The bad news is that I am not a programmer.

    Do we have any programmers in the group who could help?
     
  6. MattyUSA

    MattyUSA Private

    Joined:
    Oct 3, 2007
    Messages:
    21
    Likes Received:
    0
    Hi Pharaoh / timinaz

    Timinaz, yes thats what I'm saying. The closest limit usually hits first. So long as you keep it fairly close to the starting position. 10 pips is pretty safe, 20 pips less so, 100 pips and you'd better be right about the trend you bet on.

    Yes, you are right again, you need to be right more often than you are wrong but since you are only relying on the market volatility so it is easier to be right. So long as you avoid strong trends and peaks as best you can. In theory it shouldn't matter which direction you place the trade. Put in practice the market tends to trend. what you don't want is the market trending off in the opposite direction to your most recent trade. As such it simply makes more sense to place the trade in the direction of the current strongest trend and hope it doesn't reverse before your profit lock is hit. The loss limit needs to be big enough to avoid the retracements and a couple of support/resistance levels so that it is only triggered by a very strong trend in the opposite direction to your trade. The closest limit gets hit first, typically, but it is risky.

    I've been playing with other systems as well but I'd estimate around 40+ trades placed using this system and only one wrong 'hit' so far. For some I disabled the profit lock and let ride further. A couple I ended early but most I let the limits close the trade.

    Pharaoh I'm a programmer. But I am very, very new to Forex. What's an EA?

    How can we measure volatility? Can we find the typical range of movement easily for a given date range for a currency pair? perhaps a by the hour breakdown? 5pm typically moves an average of Xpips whilst 6pm typically an average of X pips and so on. I'm sure these tools exist (rather than me reinvent the wheel) but I've not begun looking for them. GFT Forex (not recommended by me) told me the GBP/USD pair typically moves 80 pips on average a day with EUR/USD around 40pips a day. Where could they get that collated data from?

    I would love to be able to firm this strategy up with statistics and facts. Lets talk. Feel free to send me an email.
     
    #6 MattyUSA, Oct 31, 2007
    Last edited: Oct 31, 2007
  7. Pharaoh

    Pharaoh Colonel

    Joined:
    Oct 3, 2007
    Messages:
    19,655
    Likes Received:
    2,200
    Hi Matty!

    I PMed you my email. I don't think you have enough posts to have private messaging outbound, but you probably can receive (I hope). Let me know if you do/don't get the message.

    An EA is an "Expert Advisor" for MetaTrader 4. It can be enabled to actually place trades live (if you feel REALLY brave) and can also be used for backtesting. It can draw information from pre-existing indicators, or can have it's own built-in indicator functions.

    I haven't played with all the indicators inside of MT4, but Bolliger Bands comes to mind as a quick and dirty volatility indicator. Otherwise, something that measures both height and overlap of a certain number of candles (height alone wouldn't differentiate volatility from a strong trend).

    If this could be worked out, then it should be possible to try to optimize your strategy for profit, stoploss, and volatility (and maybe time of day also). Then this could be made into it's own custom indicator with buy and sell signals for those who like to trade manually and functional (hopefully pip-producing) EA.

    Speaking of time of day, you mentioned that you place these trades at 7:30 am and occasionally at 6:00 pm. Are you in the Eastern time zone?


     
  8. MattyUSA

    MattyUSA Private

    Joined:
    Oct 3, 2007
    Messages:
    21
    Likes Received:
    0
    Hi

    Yup, EST. Based in NJ. Got your PM too.

    Remember I'm very new. I am still learning what a lot of the indicators are. I'll read up on Bollenger Bands, when I can.

    I have played with the software from GFT which I liked but hated no hedge betting. I trade with XE.com who introduce for FXCM. I'm looking to move for lower spreads but haven't yet. I haven't got to grips with MB Trading's demo I couldn't figure it out in the little spare time I have had to look at it so far. I haven't played with MT4 but it was on my list to experiement with.

    I think you'd have to hold my hand a tad whist I picked up the platform(s).

    Height alone wouldn't be a good indicator, you're right, but the full days highs/lows might be. Or you could measure the open close values for different periods (5mins, 30mins, 1hrs, etc) or calculate the difference between the high in that period and the open/close value. This would give you a numerical representation of the candle 'wicks'.

    Neh I'm rambling. It's probably best we chat via email or phone and we can figure it out I'm sure. I guess we have to define the criteria it si best to use as a measure first. The trigger is movement so the simpliest measure would be perhaps an average or mean pip range for every day over the last week. Then you can say on average the market is moving XYZpips a day based on last weeks data. Lets say it was 40 pips. This would allow us to look at a days open figure judge, that it had moved 35 pips and so based on the average/mean figure we had of 40pips movement a day judge that it wasn't worth placing the trade. Where as if it had only moved 5 pips it was 'likely' to move a good few more.

    Repeat for Mondays, Tuesdays etc then by the hour and we have a guide for spotting patterns in volatility. If it always moves sharply between 2am and 4am on Tuesdays we should spot it and target that section for a higher profit trade.

    Neh, I'm tired, not sure how sensible my thnking is right now so I'll leave it at that.

    I'll drop you a email sometime soon.
     
  9. Pharaoh

    Pharaoh Colonel

    Joined:
    Oct 3, 2007
    Messages:
    19,655
    Likes Received:
    2,200
    Cool! I'll do a little more digging around for volatility indicators and see what I can come up with.

    If anyone else happens to have a better grip on any of this, feel free to join in.
     
  10. Voxpop

    Voxpop Recruit

    Joined:
    Nov 19, 2007
    Messages:
    2
    Likes Received:
    0
    Thank you for taking the time to share your knowledge MattyUSA.
     

Share This Page